Tweak in policy helps attract 'realistic' bids for coal blocks: Experts

Revenue-sharing model drove interest among larger firms, say experts

Coal user industries were able to offer realistic bids in the coal auctions last week because the government had changed the rules of the auction, say industry experts, analysts and government officials. This could be a valuable lesson for the government, the experts added, as the rules governing the auction of natural resources to companies need not remain fixed.
 

“Despite the global projected over-supply of coal, the domestic industry found there was value in bidding for the mines,” said Ujjwal Chatterjee, former chief operating officer, Tata Sponge.
 

Chatterjee added that the interest was triggered by the flexible revenue-share model that the government had adopted in these auctions. The model allows auction bids to be counted as variable costs to be covered in the final price charged to consumers, something that winners of coal blocks in the previous auction held in 2015 were not permitted. 
 

Other experts, too, pointed out it was the attractive revenue-share model that led major companies, such as the Aditya Birla Group, Adani Group and Vedanta, to bid for the coal blocks this time. The results showed that India was learning the right lessons when it came to auctions, said former Coal India chairman, AK Jha.
 

Except for a couple of overly bullish bids, the winners have secured reasonable revenue shares to factor into their balance sheets. The exceptions are Sarda Energy, which quoted a 66.75 per cent revenue share, and Goa-based Chowgule & Co, which promised a 41 per cent revenue share. The median revenue share score was 20 per cent. Sarda was one of the companies that had lost its coal mine when, in 2014, the Supreme Court cancelled the allocation of 204 coal blocks. The company had claimed that the loss had set it back by close to Rs 100 crore.
 

The new rule for auctioning coal blocks could be applied to the telecom sector as well. The Telecom Regulatory Authority of India has refused to change the model for spectrum auction which was used in the “successful” auctions of 2012. The high revenue share formula has worked like a fixed cost for telecom service providers like Bharti Airtel and the erstwhile Vodafone, making them incur massive losses.
 

The coal auction rules this time set the floor price for the bids to be at least 10 per cent more than the market price of coal. Crucially, the market price was pegged to the National Coal Index, which has been developed by the Indian Statistical Institute, Kolkata, as a weighted average of the change in the price of coal, with the base year of 2017-18.
 

This has brought a degree of realism in the pricing, For instance, if coal prices shoot up, the state government will gain, just as a dip would clip back the revenue share. Hence, the new model reduces the risk for bidders, unlike the auctions of 2015, where they had to pay a fixed sum to the government irrespective of their sales numbers.
 

As a result, out of the 38 blocks offered this time, 19 got bids from more than one player. According to coal minister Pralhad Joshi, states will get about Rs 1,048 crore from the auctioned mines. The ministry estimates that once all the 19 mines go into production, they will generate a combined total annual revenue of Rs 6,636 crore for the states.
 

The Centre does not earn any money from coal auctions. But with the auctions throwing up decent results, the coal ministry is now planning new rules for the winners, such as enforcing milestones in mine development to incentivise early production. The next round of auctions would incorporate these changes, said coal secretary Anil Jain, while speaking with industry leaders at the Federation of Indian Chambers of Commerce and Industry (Ficci) recently.
 

Anil Swarup, former secretary, coal ministry, who was in office during the first auctions of 2015, said that this was a remarkable change in the rules. Earlier, coal block winners had to pay a pre-fixed amount to the government, in addition to an annual payout. “The current revenue-share model has allowed companies to work out long-term plans before they put up a bid,” he said.  
 

Swarup added that the earlier model was built on the basis of the observations of the Comptroller and Auditor General, and the surmise that there had been a revenue loss in the allocation of the coal mines. “It created a scare about the availability of coal and made prices shoot up,” he said.
 

Companies, especially in the power sector, bid so aggressively that they promised that the cost of coal would not be passed on to customers and a key portion of the variable cost would be absorbed by them. Moreover, they committed to pay an additional premium to the government. So in a sense, the auctions were penalising the bidders by asking them to bid on wrong parameters.
 

The power ministry boasted that electricity consumers would get a benefit of Rs 69,311 crore due to the lower tariff, but the price reductions never came to pass.
 

A PricewaterhouseCoopers note on the auctions of 2015 sums up the issues: “If we compare prices quoted in many of the bids, they were well beyond the comparative costs of import or replacement fuel. This may be justified for existing projects as they have the added advantages of fuel security and recovery of capital investments. However, new projects may not attract investors with such aggressive price quotes and lower returns from the proposed mining project as well as related end-use plant.”
 

Since variable costs could not be passed to consumers, companies tried to load their fixed costs onto their tariffs. The government moved to block this effort. Monnet Ispat was one of the first to surrender its coal licence. Others refused to open their mines as it was clear that every tonne of coal mined would raise costs, but earn no revenue. As against this, in the current auction, the interests of the government and the bidders seem to have coincided.